Tackling the web of regulatory issues sparked by the growing convergence of computers, TV, cable, telephony services, and the Net, the FCC's staff working paper--"Internet Over Cable: Defining the Future in Terms of the Past"--concludes that some Net access services could be treated as cable services. Net access providers and interactive services now are categorized as "information" or "enhanced" services and therefore escape much of regulatory red tape endured by telecommunications carriers.

The 118-page paper endeavors to lay out the consequences and benefits of calling a service such as @Home a "cable operator."

But the staff paper's findings aren't the last word: Any changes that would reclassify cable Net access and services would be subject to a lengthy rule-making process that includes public comment as well as approval by the commission.

The paper serves as a "discussion of the regulatory classification issue for Internet over cable systems, and the related common carrier issues. [It is] intended to map the contours of the legal and policy issues surrounding the clash of new, advanced capabilities such as the Internet with the old regulatory framework," states the paper's author, Barbara Esbin, who is the associate chief of the FCC's Cable Services Bureau.

The report comes at a time when mergers and acquisitions and the blending of digital technologies are leading the charge toward convergence and new business markets. Case in point: In June, long distance giant AT&T said it would pay $48 billion for the second-largest cable company, Tele-Communications Incorporated, which owns a 42 percent stake in @Home. Each of these companies, however, is regulated differently now, with @Home being the least hindered.

The FCC's future treatment of cable Net access companies will be closely watched. And the stakes are high, because some in the industry fear that saddling the virgin broadband Net services with regulations could stifle the rollout of high-speed access.

For instance, the report says that under the FCC's rules for frame relay services, cable companies could be forced to offer their Net access networks at wholesale prices to online service competitors such as America Online.

It is well known that cable companies and services don't want to share their high-speed networks. If services such as @Home and Road Runner were dubbed "cable," the companies may not have to unbundle their networks under the current regulatory framework.

"Our Net access is way faster than what the telephone companies can offer, so allowing them to get on our network would be damaging to our business on the Internet side," said Ellen East, a spokeswoman for Cox Communications, which has spent $4 billion to upgrade its network and now has about 34,000 Net access customers.

"It is a competitive advantage," she added. "Clearly our network is superior--and we would like to hang on to that."

Companies such as @Home and Road Runner already pay "franchise" fees to cities, which consist of up to 5 percent of the annual gross revenues for those services.

But the FCC paper states the companies would only have to continue paying those fees if they were classified as cable operators. In contrast, if they were classified as Internet services, they would no longer be subject to them.

"If Internet-based services offered by cable operators over their systems are treated as cable services, they would become subject to any franchise fees imposed for cable services under the relevant franchise agreement," the paper states. "On the other hand, if these Internet-based services were not treated as cable services, then cable Internet-based services would certainly not be subject to cable franchising fees."

Cable rates are subject to some regulation, but those rules probably would not apply to the Net services they provide.

"The rates for certain categories of cable services are subject to regulation by local and federal authorities," the paper states. "Pay premium services, which are on a per-program or per-channel basis, are not subject to rate regulation. On its face, [this] would seem to apply to cable Internet services to the extent such services fell within the definition of 'cable services.'"

In addition, franchise agreements institute certain rules for cable programming and access, such as when adult entertainment content can air. The FCC paper recognizes that this raises some thorny censorship issues when it comes to Net access and content delivered over the same pipes as broadcast programming.

"Whether cable Internet-based services would constitute video programming will depend largely upon what content is provided over the Internet and how that content is provided," the paper reads.

"For example, a basic Internet connection permitting a subscriber to visit Web sites put up by third parties may not be comparable to programming by a television broadcast station," it says. "In contrast, live video images transmitted across the Internet by the technique known as 'streaming' video might appear much closer to traditional broadcasting, particularly from the point of view of the subscriber."

Overall, the paper seems to confirm what converging industries have known all along--that when the walls come down between phone, cable, cellular, and Net access companies, the current regulatory framework makes less sense.

"These situations graphically illustrate the difficult task of sorting out appropriate regulatory categories in a world in which any carrier can offer any service over any transmission medium--wired, wireless, cable, voice, data, or video," the paper states. "Rather than concentrate solely on trying to squeeze the Internet and Internet-based services into familiar categories, the commission might better endeavor to give full meaning and effect to this new regulatory category in its domain."

Reactions to the paper were conservative, as many cable operators that provide Net access had yet to plow through it.

"Clearly the idea of how regulation will work in the new world of communication is something all of us in the industry are going to have to look at--the convergence is happening," said Wayne Jackson, AT&T's spokesman in Washington.

"For example, there has been a whole class of providers that have popped up offering Net telephony. They don't have pay access charges, and that is giving them pricing advantages," he added. "We think that clearly the commission ought to be applauded for its recognition that maybe the old ways of doing things are not an automatic for how we approach the future."

@Home welcomed the ideas presented in the paper.

"It doesn't propose any new regulations or say that an @Home-type service should be regulated any more than it is," said David Pine, @Home's vice president and general counsel.

"What the paper does say is that data services delivered over cable may fit in the definition of a cable service and that is something we are comfortable with," he added. "The primary benefit is that it would prevent third-party [Net access providers] from obtaining access to the cable plants to deliver their own services. @Home believes that we really want to foster facility-based competition in the broadband industry."

Others said if cable operators end up getting regulatory relief and are allowed to harbor their data networks, then telecommunications companies should get the same
treatment.

The FCC has proposed lifting restrictions on telcos, but only if they set up separate data subsidiaries that would have to pay the same rates as other independent
competitors for access to their local switch centers.

"They should shrink regulation, not expand it," said Peter Huber, a telecommunications attorney, who recently wrote Law and Disorder in Cyberspace: Abolish the FCC and Let Common Law Rule the Telecosm.

"At every corner, at every decision point, the FCC has basic options to expand regulation or contract it--and they certainly haven't done that with telephone companies." he said.